A STUDY ON RISK MANAGEMENT IN COMMODITY FUTURES

A Dissertation Report submitted in partial fulfillment of the requirements for the Award of the degree of Master of Business Administration (MBA) 2006-2008

SUBMITTED BY

NOUSHAD. K.K
Reg. No. 06ACCM6055

Under the guidance of

Mr. MUJEEB KHAN (Assistant Professor)

AL-AMEEN INSTITUTE OF MANAGEMENT STUDIES Hosur Road, Near Lalbagh Main Gate, BANGALORE (AFFILIATED TO BANGALORE UNIVERSITY)

C ON T E N T S

S.L NO CHAPTER NO

TITLES

PAGE No

I.

INTRODUCTION

01

II. RESEARCH DESIGN

37

III. 3

COMPANY PROFILE 41

IV.

DATA ANALYSIS AND INTERPRETATION

48

V. 5

SUMMARY OF FINDINGS, SUGGESTION AND CONCLUSION

89

BIBILIOGRAPHY

93

ANNEXURE 7 95

LIST

OF

TABLES

S.L NO:

TITLES OF TABLE

PAGE NO:

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

SEX PROFILE AGE PROFILE EDUCATION PROFILE OCCUPATION PROFILE INCOME PROFILE NO: OF INVESTORS IN COMMODITY FUTURES TYPES OF INVESTMENTS EXPERIENCE OF THE PREVIOUS INVESTMENTS OBJECTIVE OF INVESTMENT AMOUNT OF INVESTMENT TYPES OF INVESTMENT WORTH OF COMMODITY FUTURES RISK MANAGEMENT TECHNIQUE SOURCE OF INFORMATION ABOUT COMMODITY FUTURES INVESTORS PERCEPTION MARGIN CHARGES BY THE COMPANY INVESTORS OPINION ABOUT THE COMMODITY FUTURES AS A RISK REDUCTION INVESTMENT

67 69 70 72 74 75 76 78 79 80 81 82 84 86 87

16

88

LIST OF CHARTS AND GRAPHS

S.L NO: 1 2 3 4 5 6

TITLES OF CHARTS INDIAN FINANCIAL SYSTEM RISK IN COMMODITY FUTURES MODUS OPERANDI TYPES OF ORDER AGRICULTURE FUNDAMENTALS INDUSTRIAL FUNDAMENTALS

PAGE NO: 5 49 54 58 63 65

LISTS OF GRAPHS
1. 2 3 4 5 6 7 8 9 10 11 12 SEX PROFILE AGE PROFILE EDUCATION PROFILE OCCUPATION PROFILE INCOME PROFILE NO: OF INVESTORS IN COMMODITY FUTURES TYPES OF INVESTMENTS EXPERIENCE OF THE PREVIOUS INVESTMENTS OBJECTIVES OF THE INVESTOR AMOUNT OF INVESTMENT TYPES OF INVESTMENT WORTH OF COMMODITY FUTURES 67 69 70 72 74 75 76 78 79 80 81 82

13 14 15

RISK MANAGEMENT TECHNIQUE SOURCE OF INFORMATION ABOUT COMMODITY FUTURES INVESTORS PERCEPTION ABOUT THE MARGIN CHARGED BY THE COMPANY INVESTORS OPINION ABOUT RISK REDUCTION IN COMMODITY FUTURES.

84 86 87

16

88

CHAPTER - I

INTRODUCTION

THE INDIAN FINANCIAL SYSTEM

The Indian financial system consists of many institutions, instruments and markets. Financial instruments range from the common coins, currency notes and cheques, to the more exotic futures swaps of high finance.

The Indian financial system is broadly classified into 2 broad Groups:-

Organized Sector Unorganized Sector

1.

ORGANISED SECTOR

The organized sector consists of: -

1. Financial institutions

a) Regulatory

The regulatory institutions are the ones, which form the regulations, and control the Indian financial system. The Reserve Bank of India is the regulatory body, which regulates, guides controls and promotes the IFS.

b) Financial intermediaries

They are the intermediaries who intermediate between the saver and investors. They lend money as well mobilizes savings; their liabilities are towards ultimate savers, while their assets are from the investors or borrowers.

They can be further classified into

i.

Banking: -

All banking institutions are intermediaries.

ii.

Non-Banking: -

Some Non-Banking institutions also act as intermediaries, and when they do so they are known as Non-Banking Financial Intermediaries. UTI, LIC, GIC & NABARD are some of the NBFCs in India.

c) Non intermediaries:-

Non-intermediaries institutions do the loan business but their resources are not directly obtained from the saver.

ii. Financial Markets

Financial Markets are the centers or arrangements that provide facilities for buying & selling of financial claims and services. Financial markets can be classified into primary, secondary, capital and money markets as shown in the figure.

Organized markets

These markets comprise of corporations, financial institutions, individuals and governments who trade in these markets either directly or indirectly through brokers on organized exchanges or offices

Unorganized markets

The financial transactions, which take place outside the well-established exchanges or without systematic and orderly structure or arrangements constitutes the unorganized markets. They generally refer to the markets in the villages.

Chart showing the Indian Financial System The Indian Financial System

Organized Sector

Un-Organized Sector

Financial Markets

Financial Services

Financial Institutions

Financial Instruments

Money Lenders

iii. Financial instruments

Financial instruments constitute of securities, assets and claims. Financial securities are classified as primary and secondary securities.

The primary securities are issued by the companies directly to the ultimate savers as ordinary shares and debentures.

While the secondary securities are issued by the financial intermediaries to the ultimate savers as bank deposits, insurance policies so and on.

iv. Financial services

The term financial service in a broad sense means Mobilizing and allocating savings. Thus, it can also be offered as a process by which funds are mobilized from a large number of savers and make them available to all those who are in need of it, particularly to the corporate customers.

2. THE UNORGANIZED SECTOR

The unorganized financial system comprises of relatively less controlled money lenders, indigenous bankers, lending pawn brokers, land lords, traders etc. This part of the financial system is not directly controlled by RBI.

Legislations passed by the RBI Relating to Foreign Investments

The Reserve Bank of India through its circular RBI/2004/39 A.P.Dir series circular no 64/February 4 2004 has introduced a special scheme The Liberalized Remittance scheme of USD 25,000 (per year) for Resident individuals.

The implications of this legislation are

Resident Indians can now freely invest in any overseas transaction; this opens the entire gamut of the Indian Investment scenario to overseas instruments like forex markets, forex derivatives, index futures, commodity future and options and all other alternative investments. The legislation would eventually lead to complete liberalization in the areas of overseas investments.

GUIDELINES BY THE RBI PERTAINING TO COMMODITY FUTURE TRADING

The guidelines are: -

These guidelines cover the Indian entities that are exposed to commodity price risk.

Name and address of the organization

1) A brief description of the hedging strategy proposed: Description of business activity and nature of risk. Instruments proposed to be used for hedging. Exchanges and brokers through whom the risk is proposed to be hedged and credit lines proposed to be available. The name and address of the regulatory authority in the country concerned may also be given. Size/average tenure of exposure/total turnover in a year expected.

2) Copy of the risk management policy approved by the Board of Directors covering: I. Risk identification II. Risk measurements III. Guidelines and procedures to be followed with respect to revaluation/monitoring of positions. IV. Names and designations of the officials authorized to undertake transactions and limits.

3) Any other relevant information

The authorized dealers will forward the application to Reserve Bank along with copy of the Memorandum on the risk management policy placed before the Board of Directors with specific reference to hedging of commodity price exposure. .

a. i. All standard exchanges traded futures will be permitted. ii. Tenure of exposure shall be limited to 6 months. Tenure beyond 6 months require Reserve Banks specific approval. iii. Corporate who wish to hedge commodity price exposure shall have to ensure that there are no restrictions on import/export of the commodity hedged under the Exim policy in force. would

After grant of approval by Reserve Bank, the corporate concerned should negotiate with off-shore exchange broker subject, inter alia, to the following:-

Brokers must be clearing members of the exchanges, with good financial track record. Trading will only be in standard exchange- traded futures contract/options .

SECURITIES AND EXCHANGE BOARD OF INDIA

SEBI was setup in April 12, 1988. To start with, SEBI was set up as a nonstatutory body.
It took 4 years for the government to bring about a separate legislation in the name of securities and exchange board of India Act, 1992, conferring statutory powers over practically all aspects of capital market operations.

Objectives of SEBI

 To protect the interest of investors so that there is a steady flow of savings into the capital market.
To regulate the securities market and ensure fair practices by the issuers of securities, so that they can raise resources at minimum cost. To provide efficient services by brokers, merchant bankers and the other intermediaries, so that they become competitive and professional.

Functions of SEBI
Sec 11 of the SEBI act specifies the functions as follows: Regulation of the stock exchange and self-regulatory organizations. Registration and regulation of stock brokers, sub-brokers, registrar to all issue, merchant bankers, underwriters, portfolio managers and such other intermediaries who are associated with securities market. Regulation and registration of the working of collective investment schemes including Mutual funds. Prohibition of fraudulent and unfair trade practices relating to security market. Prohibit insider trading in securities. Regulation substantial acquisitions of shares and take over of companies.

SEBI guidelines for COMMODITY FUTURES TRADING

There are many regulatory authorities, which are monitoring commodity futures trading, one of them is SEBI. The following Report is one of the regulatory frameworks for the commodity futures trading.

Report of the committee appointed by the SEBI on participation by Securities Brokers in Commodity Futures Markets under the chairmanship of Shri.K.R. Ramamurthy (February 5, 2003)

The following were the recommendations:I) Participation of Securities Brokers in Commodity Futures Market

The committee was of the unanimous view that participation of intermediaries like securities brokers in the commodity futures market is welcome as it could inter-alia increase the number of quality players, infuse healthy competition, boost trading volumes in commodities and in turn provide impetus to the overall growth of the commodity market.

Since the commodity market falls under the regulatory purview of a separate regulatory authority viz., Forward Market Commission, to ensure effective regulatory oversight by the Forward Market Commission, and to avoid any possible regulatory overlap, the pre-condition for such entry by intending participating securities brokers in the commodity futures market would be through a separate legal entity, either subsidiary or otherwise. Such entity should conform from time to time to the regulatory prescription of Forward Market Commission, with reference to capital adequacy, net worth, membership fee, margins, etc.

The committee took note of the fact that the existing provisions of the Securities Contracts (Regulation) Rules, 1957 forbid a person to be elected as a member of a recognized stock exchange if he is engaged as principal or employee in any business

other than that of securities, except as a broker or agent not involving any personal financial liability. The Committee recommended that the above provisions in the Securities Contract (Regulations) Rules be removed/amended suitably to facilitate securities brokers participation/engagement in commodity futures.

An important felt need was the necessity to improve market awareness of trading and contracts in commodities. The committee therefore recommended the forward market commission take appropriate initiatives in training the market participants.

II) Risk containment measures In the background of the Forward Market Commissions report on risk containment measures currently obtaining in commodity markets and the committees recommendation to permit security brokers participation in commodities markets only through a separate legal entity, the committee considers that ensuring strict compliance of the regulatory prescriptions like net worth, capital adequacy, margins, exposure norms, etc., by the respective market regulators, and due oversight would be an adequate safeguard to ensure that the risks are not transmitted from one market to the other.

III) Utilization of existing infrastructure of stock exchanges

On the issue of convergence/integration of the securities market and commodities market, that is, of allowing stock exchanges to trade in commodity derivatives and vice versa, the committee was of the view that in the current statutory and regulatory framework and existence of two separate and established regulators, the issue of integration of the two markets would require detailed examination, particularly for the purpose of defining clearly the scope of regulatory purview and responsibility.

Also, given the concerns raised by a section of members that such integration may lead to further fragmentation of volumes and liquidity in the nascent commodity markets, the committee was of the view that the issue of markets could be taken up for consideration at a future date as the two markets mature further.

SEBI SIGNS MOU WITH COMMODITY FUTURES TRADING COMMISSION, UNITED STATES

Securities and exchange Board of India (SEBI) signed a memorandum of understanding (MOU) with United States Commodity Futures Trading Commission (CFTC) in Washington on April 28, 2004. The MOU was signed by Mr. G. N. Bajpal, Chairman, SEBI and Mr. James E.Newsome, Chairman, CFTC. The MOU aims to strengthen communication channels and establish a framework for assistance and mutual co-operation between the two organizations.
The MOU marks the beginning of greater collaboration between SEBI and CFTC to effectively regulate and develop futures markets, in view of greater cross-border trade and cross-market linkages brought about by the globalization of financial markets. The two authorities intend to consult periodically about matters of mutual interest in order to promote cooperation and market integrity, and to further the protection of futures and options market participants. In furtherance of the objective of promoting the development of sound futures and options regulatory mechanisms, the CFTC would also provide technical assistance for development of futures markets in India. FORWARD CONTRACT ACT 1952

In India, the statutory, basis for regulating commodity futures trading is found in the Forward Contracts (Regulation) Act, 1952, which (apart from being an enabling enactment, laying down certain fundamental ground rules) created the permanent regulatory body known as the Forwards Markets Commission. This commission holds overall charge of the regulation of all forward contracts and carries out its functions

through recognized association. Futures trading are controlled by central government through this act.

The act establishes the three-tier system of control. 1. Govt of India, Department of Consumer affairs, Food and public distribution. 2. Forward market commission. 3. Recognized and registered commodity exchanges. FORWARD MARKET COMMISSION:

The FMC was established by the government of India as a statutory body in which GoI appoints its members. The FMC is under the administrative control of the ministry of civil supplies, consumer affairs and public distribution. To keep forward market under observation and take such actions in relation to them, as it may consider necessary, in excise of the powers assigned it by under the act.

INDUSTRY PROFILE

DERIVATIVE

A derivative is a security or contract designed in such a way that its price is derived from the price of an underlying asset.

For instance, the price of a gold futures contract for October maturity is derived from the price of gold. Changes in the price of the underlying asset affect the price of the derivative security in a predictable way.

Evolution of derivatives In the 17th century, in Japan, the rice was grown abundantly; later the trade in rice grew and evolved to the stage where receipts for future delivery were traded with a high degree of standardization. This led to forward trading. In 1730, the market received official recognition from the Tokugawa Shogunate (the ruling clan of shoguns or feudal lords). The Dojima rice market can thus be regarded as the first futures market, in the sense of an organized exchange with standardized trading terms.

The first futures markets in the Western hemisphere were developed in the United States in Chicago. These markets had started as spot markets and gradually evolved into futures trading. This evolution occurred in stages. The first stage was the starting of agreements to buy grain in the future at a pre-determined price with the intension of actual delivery. Gradually these contracts became transferable and over a period of time, particularly delivery of the physical produce. Traders found that the agreements were easier to buy and sell if they were standardized in terms of quality of grain, market lot

and place of delivery. This is how modern futures contracts first came into being. The Chicago Board of Trade (CBOT) which opened in 1848 is, to this day the largest futures market in the world.

Kinds of financial derivatives Forwards Futures Options Swaps

Forwards

A forward contract refers to an agreement between two parties, to exchange an agreed quantity of an asset for cash at a certain date in future at a predetermined price specified in that agreement. The promised asset may be currency, commodity, instrument etc,

In a forward contract, a user (holder) who promises to buy the specified asset at an agreed price at a future date is said to be in the long position. On the other hand, the user who promises to sell at an agreed price at a future date is said to be in short position.

Futures In futures trading, you take buy/sell positions in index or stock(s) contracts expiring in different months. If, during the course of the contract life, the price moves in your favor (rises in case you have a buy position or falls in case you have a sell position), you make a profit. In case the price movement is adverse, you incur a loss.

To take the buy/sell position on index/stock futures, you have to place certain % of order value as margin. With futures trading, you can leverage on your trading limit by

taking buy/sell positions much more than what you could have taken in cash segment. However, the risk profile of your transactions goes up. While buy/sell transactions in margin segment have to be squared off on the same day, buy/sell position in the futures segment can be continued till the expiry of the respective contract and squared off any time during the contract life.

Margin positions can even be converted to delivery if you have the requisite trading limits in case of buy positions and required number of shares in your DP in case of sell position. There is no such facility available in case of futures position, since all futures transactions are cash settled as per the current regulations. If you wish to convert your future positions into delivery position, you will have to first square off your transaction in future market and then take cash position in cash market. Another important difference is the availability of even index contracts in futures trading. You can even buy/sell NIFTY in case of futures in NSE, whereas in case of margin, you can take positions only in stocks

Options trading, you take buy/sell positions in index or stock(s) contracts expiring in different months with various Strike Price. Strike price is the Price at which the underlying Asset is Agreed to be Bought or sold. Premium is the down payment the Buyer of Call or Put is required to make for entering the options agreement. In case of Futures the Buyer has an unlimited loss or profit potential whereas the buyer of an option has an unlimited profit and Limited downside. The Seller of Futures has an unlimited loss or profit potential but the seller of an option has a Limited profit but Unlimited Downside.

A futures contract represents a contractual agreement to purchase or sell a specified asset in the future for a specified price that is determined today. The underlying asset could be foreign currency, a stock index, a treasury bill or any commodity. The specified price is known as the future price. Each contract also specifies the delivery month, which may be nearby or more deferred in time.

The undertaker in a future market can have two positions in the contract: Long position is when the buyer of a futures contract agrees to purchase the underlying asset. Short position is when the seller agrees to sell the asset. Futures contract represents an institutionalized, standardized form of forward contracts. They are traded on an organized exchange, which is a physical place of trading floor where listed contract are traded face to face. A futures trade will result in a futures contract between 2 sides- someone going long at a negotiated price and someone going short at that same price. Thus, if there were no transaction costs, futures trading would represent a Zero sum game what one side wins, which exactly match what the other side loses. History of Futures Market in India History of futures market in India suggests that futures trading started in India with an independent institution named "Bombay Cotton Exchange" in 1890. Hence needless to say that cotton as the first commodity to be traded in futures market. This was followed up by oilseeds, wheat, raw jute, Hessian & others. It is noteworthy to state that the current ban on Commodity Futures is not the first one from the Government. The futures market for selected commodities was banned in 1963 & again in 1965. Coincidentally, the reasons for those bans were similar to the current ban. The ruling Government at those times also thought that futures market helped in artificially jacking up prices of essential commodities. Futures Market A Perspective Put simply a futures market is a market where, a seller & buyer enter into a transaction but it is settled a predefined future date & price. Hence future trading is all about planning. Depending on the price agreed upon, the seller can plan about production without worrying about the fluctuation in prices. This is not possible in spot market thanks to the design of this market prices of commodities can be rigged by a handful of persons like middlemen.

There are a few arguments against the futures market. Let me examine them & see if they hold true
1. Futures Trading drives up prices: This is primary argument against this market. Critics say that in case of some bad news about the future, the speculators start hoarding the commodities & hence artificially driving up the prices. But common sense says that in case of some negative news about future, the prices are going to go up irrespective of whether futures market is there or not.

2. Futures Trading drives up volatility: There no evidence to support this view. On the contrary, A.S Naik, in her book "Effect of Futures Trading on Prices" clearly shows that the fluctuation in prices of commodities was higher when there were no futures trading as compared to prices when there were futures trading.

3. Futures Market is not transparent: Traditionally, poor Indian farmer is exploited by bigger & richer farmers by buying their produce at sub-market level prices. But a futures market ensures that he knows the market prices prevailing of his produce & can directly sell in the market at those prices.

Types of futures contracts

a) Agricultural futures contracts: These contracts are traded in grains, oil, livestock, forest products, textiles and foodstuff. Several different contracts and months for delivery are available for different grades or types of commodities in question. The contract months depend on the seasonality and trading activity.

b) Metallurgical futures contract:This category includes genuine metal and petroleum contracts. Among the metals, contracts are traded in gold, silver, platinum and copper. Of the petroleum products, only heating oil, crude oil and gasoline are traded.

c) Interest rate futures contract These contracts are traded on treasury bills, notes, bonds, and banks certification of deposit, as well as Eurodollar.

d) Foreign exchange futures contract These contracts are trade in the British Pound, the Canadian Dollar, the Japanese Yen, the Swiss Franc and the Deutsche Mark. Contracts are also listed on French Francs, Dutch Guilders and the Mexican Peso, but these have met with only limited success.
Options

An option contract is a contract where it confers the buyer, the right to either buy or to sell an underlying asset (stock, bond, currency, and commodity) etc. at a predetermined price, on or before a specified date in the future. The price so predetermined is called the Strike price or Exercise price.
Depending on the contract terms, an option may be exercisable on any date during a specified period or it may be exercisable only on the final or expiration date of the period covered by the option contract.

1) Option Premium

In return for the guaranteeing the exercise of an option at its strike price, the option seller or writer charges a premium, which the buyer usually pays upfront. Under favorable circumstances the buyer may choose to exercise it.
Alternatively, the buyer may be allowed to sell it. If the option expires without being exercised, the buyer receives no compensation for the premium paid.

2) Writer In an option contract, the seller is usually referred to as writer, since he is said to write the contract.

If an option can be excised on any date during its lifetime it is called an American Option. However, if it can be exercised only on its expiration date, it is called a European Option.

3) Option instruments a) Call Option A Call Option is one, which gives the option holder the right to buy an underlying asset at a pre-determined price. b) Put Option A put option is one, which gives the option holder the right to sell an underlying asset at a pre-determined price on or before the specified date in the future. c) Double Option A Double Option is one, which gives the Option holder both the right to buy or sell underlying asset at a pre-determined price on or before a specified date in the future.

SWAPS

A SWAP transaction is one where two or more parties exchange (swap) one predetermined payment for another. There are three main types of swaps:-

a) Interest Rate swap

An Interest Rate swap is an agreement between 2 parties to exchange interest obligations or receipts in the same currency on an agreed amount of notional principal for an agreed period of time.

b) Currency swap A currency swap is an agreement between two parties to exchange payments or receipts in one currency for payment or receipts of another.

c) Commodity swap A commodity swap is an arrangement by which one party (a commodity user/buyer) agrees to pay a fixed price for a designated quantity of a commodity to the counter party (commodity producer/seller), who in turn pays the first party a price based on the prevailing market price (or an accepted index thereof) for the same quantity.

COMMODITY FUTURES

THE HISTORY OF TRADING

Although the first recorded instance of future trading occurred with rice in 17th century Japan, there is some evidence that there may also have been rice futures traded in China as long as 6000 years ago.

Futures trading are a natural outgrowth of the problems of maintaining a year-round supply of seasonal products like agricultural crops. In Japan, merchant stored rice in warehouses for future use. In order to raise cash, warehouse holders sold receipts against the stored rice. These were known as rice tickets. Eventually, such rice tickets became accepted as a kind of general commercial currency. Rules came into being to standardize the trading in rice tickets.

In the United States, futures trading started in the grain markets in the middle of the 19th century. The Chicago Board of Trade was established in1848. In the 1870s and 1880s the New York coffee, cotton and produce exchanges were born. Today there are ten commodity exchanges in the United States. The largest are the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile Exchange, New York Commodity Exchange and the New York Coffee, Sugar and Cocoa Exchange.

Worldwide there are major futures trading exchanges in over 20 countries including Canada, England, France, Singapore, Japan, Australia and New Zealand. The products traded range form agricultural staples like Corn and Wheat to Red Beans and Rubber.

What is a commodity?

Commodity includes all kinds of goods. FCRA defines goods as every kind of moveable property other than actionable claims, money and securities. Futures trading are organized in such goods or commodities as are permitted by the central government. The national commodity exchanges have been recognized by the central government for organizing trading in all permissible commodities which include precious (gold & silver) and non-ferrous metals; cereals and pulses; oil seeds, raw jute and jute goods; sugar; potatoes and onions; coffee and tea; rubber and spices, etc.

Growth of commodity futures in India

Investment in India has traditionally meant property, gold and bank deposits. The more risks taking investors choose equity trading. But commodity trading never forms a part of conventional investment instruments. As a matter of fact, future trading in commodities was banned in India in mid 1960s due to excessive speculation.

In February 2003, the government revoked the ban and threw open futures trading in 54 commodities in bullion and agriculture. It gave the go-ahead to four exchanges to offer online trading in commodity derivative products.

But it is only after almost two years, that commodity trading is finding favour with Indian investors and is been seen as a separate asset class with good growth opportunities. For diversification of portfolio beyond shares, fixed deposits and mutual funds, commodity trading offers a good option for long term investors and arbitrageurs and speculators, and, now, with

daily global volumes in commodity trading touching three times that of equities, trading in commodities cannot be ignored by Indian investors.

The strong upward movement in commodities, such as gold, silver, copper, cotton and oilseeds, presents the right opportunity to trade in commodities. Crude oil is at its highest level since the beginning of the Iraq war in March 2003. Silver and soybean prices are touching new highs since 1988, while gold is at its eight year high. Corn, wheat and copper, too, are witnessing multiyear highs.

India has three national level multi commodity exchanges with electronic trading and settlement systems. The National Commodity and Derivative Exchange (NCDEX). The Multi Commodity Exchange of India (MCX) and the National Multi Commodity Exchange of India (NMCE) the National Board of Trading in Derivatives (NBOT), offers trading on a national level, but is not completely online. Currently, the annual value of all commodity futures traded in India is $135 billion, far less than the potential $ 600 billion. What is significant, however, is the speed at which the gap is being narrowed. Volumes in commodity futures have perked up from Rs 20,000 crore to 30,000 crore per annum before the liberalization of futures trading to around Rs 5.71 lakh crore per annum by the end of 2004.

Commodities trading is now one of the hottest games in town. Volumes grew by 900 percent between financial years 2005-2006 and 2006-2007. The growth of the commodities business has been beyond what was originally projected.

With national level exchanges like Multi Commodity Exchange of India (MCX) and the National Commodities Derivatives Exchange (NCDEX) yet to complete two years of full-fledged commercial operations, the growth in commodities futures trading is almost as spectacular as Indias success in business process outsourcing.

A large potion of daily trading volumes in commodity futures is concentrated in a handful of commodities like precious metals (primarily gold and silver), Soya and its derivatives. Value of commodity futures traded across all exchanges

Fiscal year

Rs. In Crore

2004-05 6,530.74 2005-06 2006-07 1, 29,363.68 5, 71,759.56

With 45 percent of Indias GDP (or Rs. 11 lakh crore) coming from commodities, exchanges hope that eventually everyone involved in commodities trade across the value chainfrom the farmer to the processor-will be hedging their positions using futures.

With the stock markets moving in a narrow trading range and even private bankers looking to diversify client portfolios by incorporating commodities expect a lot more action ahead.

History at a glance

1900 Oilseed futures start 1920 Gold futures start 1939 Cotton options prohibited

1943 Oilseed, food grain, spices, sugar forwards prohibited 1952 Forward Contracts Regulation Act Prohibits all commodity options Prohibits cash settlement of forward contracts 1960s Forwards in primary and essential commodities prohibited 2000 BSE and NSE list index futures 2001 BSE & NSE list index options, stock options and stock futures 2002 NMCE opens as a National Commodity Exchange 2003 MCX & NCDEX open as National Commodity Exchanges

Commodity Futures Trading

The commodity futures trading, consists of a futures contract, which is a legally binding agreement providing for the delivery of the underlying asset or financial entities at specific date in the future. Like all future contracts, commodity futures are agreements to buy or sell something at a later date and at a price that has been fixed earlier by the buyer and seller.

So, for example, a cotton farmer may agree to sell his output to a textiles company many months before the crop is ready for actual harvesting. This allows him to lock into a fixed price and protect his earnings from a steep drop in cotton prices in the future. The textiles company, on the other hand, has protected itself against a possible sharp rise in cotton prices.

The complicating factor is quality. Commodity futures contracts have to specify the quality of goods being traded. The commodity exchanges guarantee that the buyers and sellers will stick to the terms of the agreement.

When one buys or sells a futures contract, he is actually entering into a contractual obligation which can be met in one of 2 ways. First, is by making or taking delivery of the

commodity. This is the exception, not the rule however, as less than 2% of all the futures contracts are met by actual delivery. The other way to meet ones obligation, the method which everyone most likely will use, is by offset. Very simply, offset is making the opposite or offsetting sale or purchase of the same number of contracts sold, sometimes prior to the expiration of the date of the contract. This can be easily done because futures contracts are standardized.

Investors choice
The futures market in commodities offers both cash and delivery-based settlement. Investors can choose between the two. If the buyer chooses to take delivery of the commodity, a transferable receipt from the warehouse where goods are stored is issued in favour of the buyer. On producing this receipt, the buyer can claim the commodity from the warehouse. All open contracts not intended for delivery are cash settled. While speculators and arbitrageurs generally prefer cash settlement, commodity stockiest and wholesalers go for delivery. The options to square of the deal or to take delivery can be changed before the last date of contract expiry. In the case of delivery- based trades, the margin rises to 20-25% of the contract value and the seller is required to pay sales tax on the transaction.

What makes commodity trading attractive? A good low-risk portfolio diversifier A highly liquid asset class, acting as a counterweight to stocks, bonds and real estate Less volatile, compared with, say, equities Investors can leverage their investments and multiply potential earnings Upfront margin requirement low Better risk- adjusted returns A good hedge against any downturn in equities or bonds as there is little correlation with equity and bond markets High correlation with changes in inflation No securities transaction tax levied.

Why commodities preferred to stocks? Prices predictable to their cyclical and seasonal patterns Less risk Real forces of supply and demand Small margin requirement Lesser investment requirement

No insider trading Entry and exit guaranteed at any point of time Cash settlement according to Mark to Market Position Relatively small commission charges Higher returns

The commodity market is a market where forwards, futures and options contracts are traded on commodities. Commodity markets have registered a remarkable growth in recent years. The stage is now set for banks to trade in commodity futures. This could help producers of agricultural products bankers and other participants of the commodity markets. Banks have

started acknowledging the commodity derivatives market. In this context the Punjab National Bank and the Corporation Bank have sanctioned loans worth Rs 50 crore to commodity futures traders over the past six months. However, the loans are not given to pure speculators. A precondition for the loans is that the futures contract must result in the delivery of the commodity.

The Role of the exchange in futures trading

a) Price discovery

As sellers offer to sell and buyers offer to buy in the pit, they provide immediate information regarding the price of the futures contract. The price is usually given as Bid-Ask. E.g.: - Price for corn might be $2.40 bid, $2.42 ask, meaning a buyer is willing to pay $2.40 a bushel, but the seller wants $2.42 a bushel.
b) Risk Transfer

In a futures transaction, risk is inherent part of doing business. The exchange provides a setting where risk can be transferred from the hedgers to the speculators.
c) Liquidity

If risk is to be transferred efficiently, there must be a large group of individuals ready to buy or sell. When a hedger wants to sell futures contracts to protect his business position, he needs to know whether he can effect the transaction quickly. The futures exchange brings together a large number of speculators, thus making quick transaction possible.

d) Standardization The exchange writes the specifications for each contract, setting standards of grading, measurement methods of transfer, and times of delivery. By standardizing the contracts in this manner, the exchange opens the futures market to almost anyone

willing to hedge risk. In the pits, then, the auction process is facilitated because only the price must be negotiated.

Functions of futures markets

The futures market serves the needs of individuals and groups who may be active traders or passive traders, risk averse or profit makers. The above broadly classifies the functions of the futures markets: 1) 2) 3) Price Discovery Speculation Hedging

1) Price discovery Futures prices might be treated as a consensus forecast by the market regarding trading future price for certain commodities. This classifies that futures market help market watchers to discover prices for the future. The price of certain commodity depends on the following factors:-

1) The need for information about future spot prices Individuals and groups in society need information not only for generating wealth but also for planning of future investment and consumption.

E.g.- A furniture manufacturer, making plywood furniture for printing his catalogue for next years needs to estimate price in advance. This task is different as the cost of plywood varies greatly, depending largely on the health of the construction industry. But the problem can be solved by using prices from the plywood futures market.

2) Accuracy The accuracy of the futures market is not too good but it is certainly better than the alternative.

2) Speculation Speculation is a spill over of futures trading that can provide comparatively less risk adverse investors with the ability to enhance their percentage returns.

Speculators are categorized by the length of time they plan to hold a position. The traditional classification includes: -

1) Scalpers They have the shortest holding horizons, typically closing a position within a few

minutes of initiation. They attempt to profit on short-term pressures to buy and sell by reading other traders and transacting in the futures pits. Thus, scalpers have to be exchange members. They offer a valuable market service because their frequent trading enhances market liquidity.

2) Day Traders:They hold a futures position for a few hours, but never longer than one trading session. Thus, they open and close to futures position within the same trading day.

3) Hedging

While engaging in a futures contract in order to reduce risk in the spot position, hedging is undertaken.

Therefore the future trader is said to establish a hedge. The 3 basic types of hedge are:
a) long hedge/ Anticipatory hedge

An investor protects against adverse price movements of an asset that will be purchased in future, i.e. the spot asset is not currently owned, but is scheduled to be purchased or otherwise held at a later date.

b) Short hedge

An investor already owns a spot asset and engages in a trade or sells its associated futures contract.

c) Cross hedge In actual hedging positions, the hedgers needs do not perfectly match with the Institutional futures. They may differ in -Time span covered -The amount of commodity -The particular characteristics of the particular goods Thus, when a trader writes a futures contract on another underlying asset, he is said to establish a cross hedge.

The regulators and regulations

The first level of regulation is the exchange. The exchange does not take positions in the market. Instead, it has the responsibility to ensure that the market is fair and orderly. It does this by setting and enforcing rules regarding margin deposits, trading procedures, delivery procedures and membership qualifications.

Each exchange consists of a clearinghouse. The clearinghouse ensures all trades are matched and recorded and all margins are collected and maintained. It also is in charge of ensuring deliveries take place in an orderly and fair manner.

TRADING PARTICIPANTS

Hedgers

In a commodity market, hedging is done by a miller, processor, stockiest of goods, or the cultivator of the commodity. Sometimes exporters, who have agreed to sell at a particular price, need to be a hedger in a futures and options market. All these persons are exposed to unfavorable price movements and they would like to hedge their cash positions.

Speculators

Speculator does not have any position on which they enter in futures options market. They only have a particular view about the future price of a particular commodity. They consider various fundamental factors like demand and supply, market positions, open interests, economic fundamentals internal events, rainfall, crop predictions, government policies etc. and also considering the technical analysis, they are either bullish about the future process or have a bearish outlook.

In the first scenario, they buy futures and wait for rise in price and sell or unwind their position the moment they earn expected profit. If their view changes after taking a long position after taking into consideration the latest developments, they unwind the transaction by selling futures and limiting the losses. Speculators are very essential in all markets. They provide market to the much desired volume and liquidity; these in turn reduce the cost of transactions. They provide hedgers an opportunity to manage their risk by assuming their risk.

Arbitrageur

He is basically risk averse. He enters in to those contracts where he can earn risk less profits. When markets are imperfect, buying in one market and simultaneous selling in another

market gives risk less profit. It may be possible between two physical markets, same for 2 different periods or 2 different contracts.

INTERMEDIARY PARTICIPANTS

Brokers
A broker is a member of any one of the futures exchange, one gets commodity or financial futures exchange, one gets the right to transact with other members of the same exchange. All persons hedging their transaction exposures or speculation on price movement cannot be members of a futures exchange. Non-member has to deal in futures exchange, through a member only. This provides the member the role of a broker.

All transactions are done in the name of the member who is responsible for final settlement and delivery. This activity of a member is price risk free because, he is not taking any position on his account, but his other risk is clients default risk. He cannot default in his obligation to the clearinghouse, even if client defaults. The trading floor consists of the pit and the quote boards. High above the trading floor, or each wall of the trading room, are the quote boards, where the tick-by-tick price appears for each contract of each commodity.

On the quote board, the most recent price appears at the bottom of a column process, with the next previous price above that and the 5 precious prices above that. As a trade is made the other prices move up, with the bottom, and the other prices move up, with the top price dropping off. The quote board also gives the previous days settlement price and the high-low of the days trading. And the net difference between the last price and the previous days settlement price.

The pit

A pit is the heart of the open outcry market system. It is the place where the various bid and sell offers are made by floor brokers, and floor traders on behalf of their clients.

Spreads
Spread is the term used when, a client buys one contract while simultaneously sell another. They are: -

Intra market spreads

These consist of buying one month in a particular commodity and simultaneously selling in a different month in the same commodity.

Inter market spreads

These consist of buying one commodity, and simultaneously selling a related commodity. E.g. buying silver and selling gold.

The bid and the offer

The only part of a contract that is negotiated in the pit is the price. Everything else is standardized. Therefore, the trader in the bid needs to communicate only 3 things Whether he wishes to buy or sell The number of contracts he wishes to buy or sell

The price

How price reach the Quote Board

At the exchange, a pit observer, who is an employee of the exchange, stands in the pit with a walkie-talkie. Each time the price changes; the observer radios the info to the exchange operator, who enters the info to the exchange quote entry system. The price immediately appears on the quote board and is simultaneously broadcasted on the exchange ticker to the public.

OPERATIONAL DEFINITIONS

Short selling

Selling first is known better as shorting or short selling. In futures trading, since one is taking a future delivery, its just as easy to sell first and then buy later. To offset the obligation to deliver, all one needs to do is to buy back the Contract prior to the expiration of the Contract.

Margin

A margin refers to a good faith deposit made by the person who wants to buy or sell a Contract in a futures exchange. It is a small percentage of the value of the underlying commodity represented by the Contract, generally in the neighborhood of 2 to 10%.

Leverage

Leverage is the ability to buy or sell $100,000 of a commodity with a $5000 security deposit, so that small price changes can result in huge profits or losses. Maintenance margin

Maintenance margin is the amount which must be maintained in ones account as long as the position is active.

Margin call

If the equity balance in the account falls below the maintenance margin level, due to adverse market movement, the account holder will be issued a margin call.

Lot

A lot refers to the number of Contract that one wishes to buy or sell.

Tick

A tick refers to the minimum price fluctuation, is a function of how the prices are quoted and set by the exchange.

Float

Float refers to the concept, when an investor who has taken a position, but does not want to liquidate his position at close of the market.

Limit up/down

It refers to the maximum amount that the market can move above or below the previous days close in a single trading session. If the price moves up it is known an limit up, when the price moves down its is known as limit down

CHAPTER-II

RESEARCH DESIGN

INTRODUCTION Agriculture is the back bone of the Indian economy, in India 63% of GDP is derived from the agriculture and allied activities. The investors are mainly divided in to three category . High risk taking investors Medium risk taking investors Less risk taking investors
High risk taking investors always give preferential consideration to stock market in India .They are ready to spend their disposable income in share and mutual fund .Medium risk taking investors try to derive their income in commodity market .in a country like India commodity

exchange system has a wider scope. Commodity includes all kinds of goods. FCRA defines goods as every kind of moveable property other than actionable claims, money and securities.

STATEMENT OF THE PROBLEM

To analyze the risk Management in commodity futures with special Reference to i focus India Pvt. Ltd.

To study the potential of commodity market and derivative market in India. The problem also enquires the risk involved in the commodity market. Rational investors always give their preference to invest in land and gold. The old scenario is changed due to New Economic Policy and abolition of trade barriers in international commodity exchange system. In India the commodity market has a lion portion in the total international trade. Indian economy consists with major portion of agriculture revenue and less portion in industrial and service sector.

OBJECTIVES OF THE STUDY

o To study the factors effecting on the functioning of commodity market

o To study the volume of risk involving in commodity market

o To study the opportunity and threats in commodity market

o To study the perception of investors in commodity market

o To give suggestions for improvement in functioning

SCOPE OF THE STUDY

The scope of the study is confined to the core activities and services of ifocus to their investors especially in commodity like gold and silver.

RESEARCH METHODOLOGY

Research Methodology is a systematic way for solving any research problem. It is a science of analyzing how research is done scientifically. It studies the various steps that are generally adopted by a researcher to study the research problems. This study would be conducted with the help of primary and secondary data

SOURCE OF DATA The proposed study would require two types of data.

Primary Source:

Questionnaires is used to collect the data from the

employees and executives of the commodity market which would be useful for interpretation.

Secondary Source: Internet ,Journal and Books

SAMPLE DESIGN

In this study convenient random sampling method is used to select the respondents. The sample size is 30 respondents.

TOOLS FOR DATA COLLECTION

The questionnaire is the tool used for data collection.

ANALYSIS AND INTERPRETATION

The various tools for analysis used are graphs, charts, percentage growth, secondary data.

LIMITATIONS

o Time constraint. o Personal bias of respondent o Non availability of data.

o Commodity market is spread over a large area therefore generalization is difficult

CHAPTER-III

COMPANY PROFILE

INTRODUCTION

iFocus is a financial services brokerage house managed by team of professionals who believe in highly reliable and efficient services. iFocus focused on taking rapidly growing investors to a new dimension of steady and progressive growth of their investment. iFocus is solidly capitalized to meet the demands of Retail clients and
sufficiently caring to ensure that service is not compromised. iFocus Research analysts will educate clients how the financial market works, how investors can identify and track opportunities including fundamental factors such as supply, demand and technical analysis. IFocus financial India (P) Ltd was incorporated in the year 2004. The head quarter of the company is in Bangalore. iFocus (P) Ltd is an introducing brokerage firm which has been incorporated with an objective of creating an access to the World Money Market to its customers who has desire to enter and trade through number of exchanges. Modern management techniques have been incorporated in its business so that its customers are treated with precision and transparency. iFocus group has a wealth of professionals who constantly use their expertise in keeping the investors well informed about the avenues in the market. iFocus is a flat hierarchical organization and hence the decision making process is faster. It has an excellent track record and clear management approach. Well-established operational presence, high tech offices, qualified human resources and deep financial soundness are its outstanding features. The internal as well as external factors enumerated above have paved the way for the iFocus group to become the leaders in the field. The secret of iFocus success lies in the integration of degree of efficiency and low cost.

VISION To be a preferred global financial services company with innovative investment ideas for wealth creation.

MISION OF THE COMPANY iFocus (P) Ltd believe in commitment to our clients and strive to treat each business relationship with extra care and aims to be a single destination of all kinds of financial trading solutions and services by devoting its time and infrastructure for providing best possible trading platform for existing as well as new customers.

PROMOTERS Mr.Badri Narayanan is the chairman and CEO of the iFocus India (P) Ltd. He is a professional skilled person in the field of financial services and completed Chatered Accountant. Mr.Balasubramanyam is the director cum in charge of finance department.

MANAGEMENT TEAM iFocus have a team of dynamic professional managers in various department. They are giving information about the market condition, variation to their clients at exact time.

PEOPLE Our assets are our people, capital and reputation. Integrity and honesty are heart of our business. We expect our people to maintain high ethical standards in everything they do because we understand that reputation is the most difficult to restore if ever diminished.

SERVICES OF THE I FOCUS

COMMODITIES Commodities a whole new opportunity to hedge business risks and an attractive investment opportunity to deliver superior returns for investors.

Their commodities broking is supported by a dedicated research team that provides both technical as well as fundamental research. The research covers a broad range of traded commodities including precious metals (gold & silver), base metals (aluminum, copper, lead & zinc), energy (crude oil & natural gas) and agri-commodities such as refsoy oil, turmeric and

channa.In addition to transaction execution, They provide our clients customized advice on hedging strategies, investment ideas and arbitrage opportunities
EQUITIES

The Equities section provides with an insight into the equities segment of NSE & BSE and also provides real-time quotes and statistics of the equities market. In-depth information regarding listing of securities, trading systems & processes, clearing and settlement, risk management, trading statistics etc are available.

DERIVATVES

The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre

determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities. With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the definition of Securities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as:A derivative include 1) A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security. 2) A contract which derives its value from the prices, or index of prices, of underlying securities

DEPOSITORY

A depository can be compared to a bank. A depository holds securities like shares, debentures, bonds, Government Securities, units etc. of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities. At

present two Depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services (I) Limited (CDSL) are registered with SEBI. A depository interfaces with the investors through its agents called Depository Participants (DPs). If an investor wants to avail the services offered by the depository, the investor has to open an account with a DP. This is similar to opening an account with any branch of a bank in order to utiliz the bank's services. The Depository facilities includes: Dematerialization, Dematerialization, repurchase/redemption of units of mutual funds, electronic settlement of trades in stock exchanges, receipt of non-cash corporate

benefits such as bonus, in electronic form, transmission of securities, and other facilities like holding debt instruments in the same account, availing stock lending/borrowing facility, etc.

ONLINE TRADING

As the Internet has become a faster and visible mode of communication across the world, iFocus joined the bandwagon of the worldwide wave to facilitate online trading. With regard to renowned financial institutions, there has been a surge in Online Margin Trading Accounts, and the trading community having understood the advantages of Online Commodities accounts started pouring into the Online Trading Investment Pattern.

iFocus FINANACIAL ADVISORY SERVICE 1. Monitor markets around the clock and accesses all market information objectively. 2. Formulate sound and disciplined trade advice to enable the customers to book Prospective profits. 3. Maintains and informs day-to-day profits and loss on open position. 4. Advice to avoid trading in thin markets or during inactive trading months and not to over trade in any given market. 5. Caution the traders to exit open positions well before maturity. 6. Affords advice to act promptly to initiate or liquidate buy or sell orders.

7. Provide a platform to trade in international market and to make investors fund more productively to get better profit.

iFocus COMMITMENT iFocus (P) Ltd strongly believe in commitment to the clients and the belief that when treated with care, such instruments can offer investors a real advantage in both managing risk

and providing exceptional opportunity for speculation and towards this end, iFocus devotes time to giving consideration to our specific investment requirement in relation to these markets.

EXCHANGE PROFILE

Multi Commodity Exchange (MCX) is an independent commodity exchange based in India. It was established in 2003 and is based in Mumbai. It has an average daily turnover of around US$1.55 billion. MCX offers futures trading in Agricultural Commodities, Bullion, Ferrous & Non-ferrous metals, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other soft commodities. MCX has also setup in joint venture the National Spot Exchange a purely agricultural commodity exchange and National Bulk Handling Corporation (NBHC) which provides bulk storage and handling of agricultural products. MCX is an independent and de-mutulised multi commodity exchange. It was inaugurated on November 10, 2003 by Mr. Mukesh Ambani, Chairman and Managing Director, Reliance Industries Ltd.; and has permanent recognition from the Government of India for facilitating online trading, clearing and settlement operations for commodities futures market across the country. Today, MCX features amongst the world's top three bullion exchanges and top four energy exchanges. MCX offers a wide spectrum of opportunities to a large cross section of participants including producers/ processors, traders, corporate, regional trading centre, importers, exporters, co-operatives and industry associations amongst others. Headquartered in the financial capital of India, Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodities futures market. Presently, the average daily turnover of MCX is around USD1.55bn (Rs.7, 000 crore April 2006), with a record peak turnover of USD3.98 bn (Rs.17, 987 crore) on April 20, 2006. In the first calendar quarter of 2006, MCX holds more than 55% market share of the total trading volume of all the domestic commodity exchanges. The exchange has also affected large deliveries in domestic commodities, signifying the efficiency of price discovery.

Being a nation-wide commodity exchange having state-of-the-art infrastructure, offering multiple commodities for trading with wide reach and penetration, MCX is well placed to tap the vast potential poised by the commodities market

CHARACTERISTICS

With a growing share of 72%, MCX continues to be India's No. 1 commodity exchange Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil and gold in futures trading

MCX has 10 strategic alliances with leading commodity exchange across the globe The average daily turnover of MCX is about US$ 2.2 billion MCX now reaches out to about 500 cities in India with the help of about 10,000 trading terminals

MCX COMDEX is India's first and only composite commodity futures price index

Key shareholders
Financial Technologies (I) Ltd., State Bank of India and it's associates, National Bank for Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, Corporation Bank, Union Bank of India, Canara Bank, Bank of India, Bank of Baroda, HDFC Bank and SBI Life Insurance Co. Ltd., ICICI ventures, IL&FS, Meryll Lynch

CHAPTER-IV

ANALYSIS AND INTERPRETATION

RISK ASSOCIATED WITH COMMODITY FUTURES TRADING There are various risks in commodity futures trading, they are:-

The different types of risks in Commodity Futures

Types of Risk

Operational Risk

Market Risk Liquidity Risk

Operational risk

The risk that, errors (or fraud) may occur in carrying out operations, in placing orders, making payments or accounting for them.

Liquidity risk
Although commodity futures markets are liquid mostly, in few adverse situations, a person who has a position in the market, may not be able to liquidate his position.

For E.g.. a futures price has increased or decreased by the maximum allowable daily limit and there is no one presently willing to buy the futures contract you want to sell, or sell the futures contract you want to buy.

Market risk
It is the risk of adverse changes in the market price of a commodity future.

The various risk management techniques used in Commodity Futures Trading

Considering the risks discussed previously, various risk management techniques are used in order to minimize the losses. There are mainly 3 techniques, they are 1. Averaging 2. Switching 3. Locking

Averaging

Averaging is a technique used when there is an existing position, and the price moves adversely. And then at that particular price, enter into a similar new position. Then take the average of these 2 prices. And when the price moves to that price liquidate the position.

Example Silver bought 1 lot@ 580 cents, expecting price to go up, with cut loss @ 577 cents Price goes to 574 cents, Buy another new lot @ 574 cents Now, the average price is 577 cents. When the price comes to 577 cents, then liquidate both the lots and thus

Profit = 3 cents Loss = -3 cents --------Net profit 0

--------(+) Felicitation Fee Rs. 3000

2 .Sold soybean 1 lot @780 cents Sold soybean 1 lot @790 cents Sold soybean 1 lot@800 cents Now, average price is 790 cents, when price comes to 790 cents, liquidate all 3 lots, thus making no profit no loss.

Switching

Switching is yet another risk management technique, when, there is an existing position, and the prices move adversely and gives all indication that it will go in the same direction for still some while. Then we have to liquidate the first position and enter a new and opposite position at the same price.

Example: Bought silver 1 lot @580 cents Cut loss@ 578 cents Price reaches @800 cents

Then sold 2 lots of silver @ 577 cents, one lot will be liquidating the first lot, and then the second one will be a new position. Now when price goes to 570 cents, liquidate the second lot, and book the profits. Profit Loss = = 7 cents (-) 3 cents ----------Net profit (+) 4 cents ----------(-) Felicitation Fee Rs 3000

Locking

Locking is yet another risk management technique, where, when there is an existing position, and the prices move adversely and give an indication that it will move in that direction, but it will come back to its original position. Here two processes are involved locking and unlocking.

It is the process where there is an existing position, and the price moves adversely, we lock by entering into a new opposite position. And then when the second price reaches a point where it will bounce back, we unlock by liquidating the second position and book profits, and then finally when the price reaches somewhere near the first position, liquidate the position, whereby we can minimize the loss

E.g.: -Bought silver 1 lot @ 600 cents----(1) Price falls to 590 cents Sold silver 1 lot @ 590 cents----(2) Price goes to 580 cents; where it is expected to bounce back, liquidate the second lot. Bought silver 1 lot @ 580 cents, liquidation (2) Price comes to 597 cents, then liquidate the (1) lot Sold silver 1 lot @ 597 cents, liquidation (1)

Profit = Loss =

10 cents (-) 3 cents ----------

Net profit (+) 7 cents ---------(-) Felicitation Fee Rs 3000

Analysis

1. There are different types of risks involved in commodity futures trading. 2. The most important one being, market risk. 3. But to counter these price risks, various types of risk management techniques are used in order to minimize the risk. 4. Among the risk management techniques, locking is the most commonly used one. . 5. Manipulation of price of the commodity is not possible as, these are global commodity prices, and in order to do so, he has to pump in huge volumes of money, which is very unlikely.

Interpretation

Although there exists various types of risks involved in trading the various risks management technique can be effectively used in order to minimize the loss due to adverse price movements.

THE COMMODITY FUTURES MODUS OPERANDI

The modus operandi of commodity futures includes the method of working which is being followed. It also includes the factors and concepts, which affect the smooth functioning of the markets, are discussed.

Modus Operandi

The Exchange

Different type of orders

Delivery Month

Price Determination

Different types of Futures positions

Commodity Futures is a 2 way market

Brokers and Commissions

Different types of participants in the market

Margin

Types of futures

The different types of futures contract position are: -

a. Open position
The trader exploits a view on the economic or technical factors affecting a market by taking a position in a single contract, usually the most liquid or front month contract.

b. Intra market spreads

The trader exploits a view on the relative pricing of 2 futures contracts of the same contract type by buying one futures contract for a specific expiry date and simultaneously selling another contract with a different expiry date.

c. Inter market spreads The trader exploits a view on the relative pricing of 2 futures contracts of different contract types by buying a future contract in one market and simultaneously selling a futures contract, usually of the same maturity, in a different futures market.

Commodity futures is a 2 way market

Buying a contract at a lower price and selling at a higher price, and booking profits, this concept is well understood and widely accepted. In commodity futures trading, one can also sell first and buy later. This concept is known as short selling.

A buyer of a futures contract is obligated to take delivery of a particular commodity or sell back the contract prior to the expiration of the contract. The latter is done by everyone usually. The purpose of shorting is to profit from a fall in prices. If one believes that the price of commodity is going down, due to oversupply and poor demand, he should go short.

Margin

Margin is money deposited in the brokerage account, which serves to guarantee the performance of the clients side of the contract. This is generally in the neighborhood of 2-10%

When the client enters a position, he would have deposited, the margin in his account, but the brokerage house is required to post the margin with a central exchange arm called the clearing house. The clearing house is a non-profit entity, which in effect is in charge of debiting this money to the accounts of winners daily.

Delivery months

Every futures contract has standardized months, which are authorized by the exchange for trading. E.g. wheat is traded for delivery in March, May, July, September, and December.

Brokers and commissions

Commission is the brokers fee for his services. Commissions are of 2 types, discounter or full service. Discounter type of commission is the commission where the broker charges his fees only for trading activities.

Full service commission is the commission charged to a broker, for advising the client regarding when to buy/sell and also providing useful analysis.

The players The players in the commodity futures market are a) Hedgers b) Speculators

The exchange open outcry and the clearing house

It is understood that the exchange does not set the prices of the traded commodities. The prices are determined in an open and continuous auction on the exchange floor by the members who are either acting on behalf of the customers, the companies, they work for or themselves. The process of the auction, which has been around for over 100 years, is called an open outcry.

People are not only willing to buy, but also to sell, and they all can be doing this simultaneously. Every floor trader has his own auctioneer, the democratic feature of an open outcry is that only the best bid and offer are allowed to come forward at any point in time, if a trader is willing to pay the highest price offered, he yells it out, and by law all lower bids are silenced, by exchange rules, no one can bid under a higher bid, and no one can offer to sell higher than someone elses lower offer.

How is price determined?

The price is determined by demand and supply, or in other words buyers and sellers. If the buyers are more aggressive then the prices go up. If the sellers are larger the prices go down.

Difference between a floor broker and the broker with whom one can place order

A floor broker is buying or selling futures on the floor either solely for himself or filling orders for his customers who are the Brokerage Houses.

A broker off the floor is licensed by the future government to execute the orders on behalf of the public.

How to place an order?

There are different types of orders that a client can give to his broker, they are:

Types of Orders

Market Order

Limit Order

Stop Order

Stop Limit Order

Market order

This is an order to buy or sell at the prevailing price. By definition, when a commodity is bought or sold at the market, the floor broker has an order to fill immediately at the best price, but in reality it is the next price

Limit order
With a limit order, the floor broker is prevented from paying more than the limit on a sell order.

Stop order

Stop order or stops are used in 2 ways. The most common is to cut loss on a trade, which is not working in ones favour. A stop is an order, which becomes market order to buy or sell at the prevailing price only if and after the market touches the stop price. A sell stop is placed under the market and a buy stop above the market.

Stops can also be used to initiate positions. They are used by momentum traders who want to enter market moving in a certain direction. E.g. a trader believes that, if gold prices trade above the psychologically significant $400 mark, it will move higher. He places a key stop at a $401. And also can place a sell stop at $396.

Stop limit order

It is an order where a client can place a stop order at a particular level with a limit beyond which the market would not be chased Sell on stop @2637, limit 35 An order of this nature will not force the market away from the limit; but is in danger of not getting filled at all.

Analysis
Commodity futures market is a 2 way market There are various parameters that are standardized such as delivery months, the exchange, margins, leverage, brokerage and commissions.

One could take any one of the future positions out of the available ones There are many types of orders, which a client can give to his broker. The price is determined in a standardized manner

Interpretation

From the above analysis, it can be seen that, the commodity futures modus operandi or operating procedure is very well defined at every level, and also standardized.

Thus there is very little scope for manipulation. Thus, it is an efficient derivative modus operandi.

Various analysis tools used to predict the price movements in commodity futures trading

In order to predict the future price of a commodity, the various analysis, tools are used. In order to make the daily or regular predictions, two important analysis made are: 1. Technical Analysis 2. Fundamental Analysis

TECHNICAL ANALYSIS

Technical analysis refers to the process of analyzing the market with the help of technical tools, which includes charts, and henceforth makes future predictions of the prices. The only important factor for analyzing the market is price action.

Bar Chart

A Bar Chart is one of the most widely used charts. The market movement is reduced on a daily basis as a vertical line between the high and low; the opening level being indicated as a horizontal dash to the left, the closing level being indicated as a horizontal dash to the right. As well as a daily record, similar charts can be drawn for weekly or monthly price ranges. Although bar charts are the most popular for technical analysts, their minor limitation is that they do not show how the market acted during the trading day.

05

06

07

A line chart is the simplest chart, and generally drawn by the non technical investor interested in getting quick visual impression of the general movement of the market. Normally closing prices are used and joined to form a line chart. They are not really adequate for market movement interpretation, but can give a very good indication as to what the market has been doing over a longer time scale, up to 10 to 20 years.

Moving averages

Moving averages are used to iron out some of the more volatile short-term movements, and can give better buy and sell signals, than just by looking at a daily high-low-close pattern. For instance, a 20-day moving average refers to the average price, of the previous 20 days. In

the above chart the red line is the 20-day average. The green line is the 50-day average and the yellow line is the 100 day average.

Gaps

A Gap is formed when one days trading movement does not overlap the range of the previous day. This may be caused by the market opening sharply highly or lower than the previous days close, as a result of important overnight news. Strong movements in overseas markets influencing our market or interest, or quite simply because the market has started to develop a strong momentum of its own.

Break away gap

This usually occurs soon after a new trend has been established as large numbers of new trend has been established, as large numbers of new investors suddenly want to join the action. It is often regarded as a confirmation that a new trend is well established.

FUNDAMENTAL ANALYSIS

Fundamental analysis is the study of supply and demand. The cause and effect of price movement is explained by supply and demand. A good fundamentalist will be able to forecast a major price move well in advance of the technician.

E.g. if there is a drought in Brazil during the flowering phase of soybean plant one can rationally explain why bean prices are rising.

There are various factors affecting the fundamentals of different commodities. They are Fundamentals affecting Agriculture Commodities

Agricultural Fundamentals

Weather

Seasonality

Supply/ Demand

Ending Carryover stocks

Total Demand

Crush, Exports

a) Supply
The supply of a grain will depend on i) Beginning stocks This is what the government says, it will carryover from the previous year

ii) Production
This is the crop estimate for the current year.

iii) Imports
This includes the commodities imported from different countries.

iv) Total supply

This is the beginning stocks+production+imports

b) Demand i) Crush
This is the domestic demand by the crushers who buy new soybeans. And crush them into the products, meal and oil.

ii) Exports
This refers to the quantity of different commodities demanded by foreign countries.

c) Ending carryover stocks

Total supply minus total demand= the carryover, ending stocks

d) Weather
Weather is the single most important factor, which affects the process of all types of grains. If there is flood drought, it will shoot up the price, due to increase in demand.

e) Seasonality
All other factors remaining equal, the grains and oil seeds do exhibit certain seasonal tendencies.

Metals fundamentals
Metals include Precious metals Industrial metals

Precious metals
The precious metals include gold, silver, and platinum. Their fundamentals are

i) Silver
Since much of the new production of silver comes as a by-product of the 3 metals (copper, zinc, lead), if the price of the 3 is depressed and production is curtailed, silver output will suffer as well. The reverse is also true.

ii) Platinum
The demand for platinum is somewhat dependent on the health of the automotive, electrical, dental, medical, chemical, and petroleum industries (where it is used as a catalyst.)

Industrial metals
These include copper, palladium. Their fundamentals are

Industrial Metals Fundamentals

Economic Activity

LME Stocks

Mining Strikes

War

Inflation

i) Economic activity
For any metal, industrialized demand is the key. If there is the threat of an economic slow down, this will be reflected in lower prices.

ii) LME stocks

Everyday the London Metal Exchange releases its widely watched stocks report, where, it lists the stocks in the exchange approved warehouses for aluminum, copper, zinc, tin, lead.

iii) Mining strikes and production problems

iv) War
Copper in particular has been called the war metal. Demand traditionally soars for all the industrial metals in times of increased defense spending.

v) Inflation
The industrial metals have been at times been called the poor mans gold and will heat up in an inflationary environment.

Analysis

Predictions in the commodity futures trading can be made through 2 tools i.e. fundamental analysis and technical analysis. Fundamental analysis seeks to protect the market by making use of the demand and supply factors. It helps to explain what the general tendency in the market is. Technical analysis, is the process of using all kinds of tools and charts, in order to make predictions, it helps to explain exactly at which point to enter a position or helps to explain at what point will be the trend reversal.

Interpretation

From the above analysis, it can be concluded that, by making use of both the fundamental and technical analysis efficiently, and henceforth take a favorable position in the market and thus benefit from the price movements.

SECTION A: Table 1: Showing the Sex Profile of the Respondent.

Sex Male Female Total

No. of Respondents 40 10 50

Percentage 80% 20% 100%

Bar chart showing the Sex Profile of the Respondents

100% 80%

Percentage

80% 60% 40% 20% 0% Male Sex Male Female Female 20%

ANALYSIS AND INTERPRETATION

The male members are more connected with Indian commodity market. Wide social network, creating in formal group with colleagues and friend good market analytical skill all these create male member to dominant female member in the area of commodity trading the earning capacity and family livelihood is directly under the control of male members in Indian culture. Due to the dignity empowered by the society create male members more attractive in the economic and market system. Only 20%of the female investors are attached with the commodity market, mainly due to the lack of awareness about the market

Table 2: showing the age profile of the respondents.

Age Group 20-30 years 30-40 years 40-50 years 50 years and above Total

No. of Respondents 18 16 11 5 50

Percentage 36% 32% 22% 10% 100%

percentage

10 36 22

20-30 30-40 40-50 50 above

32

ANALYSIS AND INTERPRETATION The Indian youth with thrive to earn create a good opportunity to the commodity market the more respondents are coming under age of 20-30 i.e. 36% the wide job market less depending by the other family members, higher level of education good analytical skill to earn something from each activity all these constitute high investment mode in the youth of India. The 68% of the respondents are come under the age group of 20-40 this shows that people with intensity and desire would be a part of Indian commodity market

Table: 3 Education profile

Educational Qualification Secondary P.U.C Graduate Post Graduate Total

No. of Respondents

Percentage

13 14 15 8 50

26% 28% 30% 16% 100%

Education profile
35% 30% 25% 20% 15% 10% 5% 0%

Percentage

Se co nd ar y

P. U .C

ra du at e

particulars

ANALYSIS AND INTERPRETATION

Education become one of the important criteria to divide the people in the society in commodity market also people has different attitude and perception based on education about the working of the particular market in this study 30% of the respondents are a recognized university degree holders which means they have innate and acquired skills to analyze a financial activity. So the market watches always need some sort of informative ideas about the working of the market

Po st

G ra du at

Table 4: Occupation profile

Occupation Government Employee PrivateSector Employee Self-Employee Businessmen Total

No. of Respondents 8

Percentage 16%

14

28%

12 16 50

24% 32% 100%

16% 32%

Government Employee PrivateSector Employee Self-Employee 28% Businessmen

24%

ANALYSIS AND INTERPRETATION From the above statistics it is clear that the majority of the respondents are business people. Who have acquired some sort of skill and knowledge about the working of a business unit they also have innate strength to analyze anticipate the demand forecasting of a particular commodity the business man taste and preference always indulged with to take some sort of reasonable risk and acquired a satisfiable return which are exceed the level of risk taken in performing that activity the private sector employees also has a predominant position in the affective of the commodity market

Table 5: Income profile

Income Group Rs. 10 20 Lakh Above Rs. 20 Lakh Rs. 4 10 Lakh Below Rs. 4 Lakh Total

No. of Respondents 9 4 20 17 50

Percentage 18% 8% 40% 34% 100%

income profile
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Below Rs. 4 Lakh Rs. 4 10 Lakh Rs. 10 20 Lakh perticulars Above Rs. 20 Lakh

ANALYSIS AND INTERPRETATION The majority of the respondents i.e. 40% earned for 400000-1000000 in every year annual income means the income earned by an individual from all his income generating sources in an accounting year this income they are mainly using for consumption purpose the annual consumption pattern of Indian community is increasing year by year this phenomena leads to less portion of amount for savings. Income consumption = saving In short the investment capacity of an individual is completely depending on the annual income or percapita income of the individual

percentage

SECTION B

Table1: Showing the percentages of respondents who have invested in commodity.

Particulars Yes No Total No. Of Respondents 46 4 50 Percentage 92% 8% 100%

Bar chart showing the Pe rce ntage of Re sponde nts who hav e inv e ste d in commodity future s
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 92%

Percentage

8%

Yes Particulars Yes No

No

ANALYSIS AND INTERPRETATION In india now days commodity market shows a wide scope in its operation the 92% of respondents invested in the commodity futures on the prevailing perception that their value of the investment is increased in near by future the commodity market as specialized with medium term investment and risk reducing technique the agrarian economy like india has a specific role in the commodity market. Market system where by the pricing system should be stebilised the investors always preferring goods such as gold and silver would help them to avoid immediate market risk by constructing moderate portfolio the goods and commodities which are owned by

the institution by way of futures and option create much more stebility in this spot market however the amount spend on forward contract should be controlled

Table 2: Showing the various investments made by respondents.

Particulars Shares Mutual Funds Bonds Bank Deposits Real Estate Jewellery Total

No. of Respondents 11 7 6 10 9 7 50

Percentage 22% 14% 12% 20% 18% 14% 100%

chart showing the various investment maid by respondents

14%

22% Shares Mutual Funds

18% 14%

Bonds Bank Deposits Real Estate Jewellery 20% 12%

ANALYSIS AND INTERPRETATION The majority of the investors are invested in shares of different company even though they are attached with commodity market they have some part of performance to stock market also for constructing, conservating and moderate portfolio even though the modern trend of investment came in to the sectors of mutual fund and portfolio management services some individuals are following traditional modes of saving like bank deposit and real estate. Real estate is separate field of investment where if need a huge investment in gold also people has investment where as ornaments is considered as the most liquid form of the investment

Table 4: Showing the experience of the respondents in their previous investment.

Particulars Good Bad Reasonable Total

No. of Respondents 26 18 6 50

Percentage 52% 36% 12% 100%

chart showing the various the experience of the respondents in their previous Investment

12%

Good 52% 36% Bad Reasonable

ANALSIS AND INTERPRETATION The majority of the clients have a reasonable experience with previous investment this statistics indicating that the majority of the investors are quite satisfied about their previous decisions. The investment decisions is a crucial decision because it is exchange of liquid cash with small piece of paper called share certificate or a statement of intangible account called d mat so every share attain a reasonable gain from the stock market other wise he wont retain in the market this statistics shows positive trend in commodity market also

Table 6: Showing the objective of the investors to invest in commodity futures. Particulars LessRisky Investment Diversification of Portfolio Very Good Returns Others Total 12 4 50 24% 8% 100% No. of Respondents 16 18 Percentage 32% 36%

Chart showing objetives of invester to invest in commodity futures

8% 32% 24% LessRisky Investment Diversification of Portfolio Very Good Returns Others

36%

ANALYSIS AND INTERPRETATION The Indian commodity market system partly depends on the willingness of the investors to invest in the specified market for every investment there is an object behind that may be good return reducing the risk, diversification of the portfolio while constructing portfolio investors consider different areas of investment portfolio is maintained or holding in such a way

that to reduce risk and increase return from the above statistics it is cleared that 36% of respondents are maintaining or holding their investment in commodity futures diversify their portfolio. Portfolio construction is a comparatively a risky task where the investor need valuable opinion and guid line of the financial advises

Table No 7 What is the amount you have invested in commodity futures?

Amount[rupees] Rs 2 lakh Rs 2-3 lakh Rs 3-5 lakh Rs 5 lakh and above Total

No of respondents 12 24 12 2 50

Percentage 24 48 24 4 100

Chart showing the amount invested in commodity future

60 50

percentage

40 30 20 10 0 Rs 2 lakh Rs 2-3 lakh Rs 3-5 lakh Rs 5 lakh and above

particulars

ANALYSIS AND INTERPRETATION

The investment of the commodity needs comparatively larger amount the savings pattern and thrive to invest in commodity market made their investment as a large portion of their business active the some portion of the society take it as in a professional spirit the annual investment of major investors under the income pattern of 2-3 lakh by investing such an amount in the commodity market they have their own expectation and prediction about the commodity exchange system the Indian customers traditionally spending their part of income in banks and nidhis. Now the picture has to be changed even rural people started to invest in commodity and stock market

Table No 8 What type of trade do you prefer the most?

particulars Short term positions Medium term loan Long term positions

No of respondents 24 16 10

Percentage 48 32 20

Chart showing the type of possitions investers prefer

60 50

percentage

40 30 20 10 0 Short term positions Medium term loan particulars Long term positions

ANALYSIS AND INTERPRETATIONS Commodity market is the place where the investors can attain their result in a medium time horizon the selection of the time horizon is completely depend on the type of the commodities they are invested the 48% of the investors from above study are interested to invest for short term in short term they can use risk management technique like locking and averaging where the bid price and ask price are conservatively derived in daily basis. Gold value is increased by 12% in the month of January 2008 it would create a positive trend in the income of the people who deliberately made their investment in gold what ever may be the term of the investment investors are always trying to increase their lot value in the pit

Table No 9 What is the worth commodity to invest in commodity market?

particulars Gold Silver Platinum Crude oil Total

No of respondents 18 13 5 14 50

Percentage 36 26 10 28 100

chart showing the mostly traded commodities by the investors

40 35

percentage

30 25 20 15 10 5 0 Gold Silver Platinum particulars Crude oil

ANALYSIS AND INTERPRETATIONS

The majority of the investors consider gold as the worthwhile commodity to invest in the market. In the month of January 2008 price increased by 12%in the international market for gold the Indian economy has also influenced by this price raise. The stability of the price in gold is mainly due to demand is always exceeds the supply in short buyers intention or willingness to buy is more than sellers ability or desire to sell the price in the any market whether capitalistic or mixed economy determined by market mechanism in short demand and supply these are two invisible part of market where no single seller cannot control crude oil price also in a booming stage due to the policies and programs of oil region economies like OPEC So gold and crude oil are the important commodities where investors are ready to invest in particular market

Table No 10 What are the risks management techniques which you use mostly?

Particulars Switching Averaging Locking Cut loss Total

No of respondents 6 14 24 6 50

Percentage 12 28 48 12 100

chart showing the risk management technique

60 50

percentage

40 30 20 10 0 Switching averaging Locking Cut loss particulars

ANALYSIS AND INTERPRETATIONS

There are different methods available to the retail investor to reduce the risk. The 48% investors are attracted with the technique of locking. In locking two positions are available to the retail investors i.e. unlocking and locking. When the prices of underlying asset become adverse the retail investor want to lock the situation and if opposite stream is happen .i.e. price moves to positive way unlock the second situation. So they can adjust the loss happened in the first situation by modifying any of these methods and of two. Some of the investors are also interested with the technique of averaging if a loss is happened for one lot but another lot for the existing price and sell when the two lots when price moves up so the retails investor can average the risk of market.

Table No 11 How did you get to know about commodity future trading?

particulars

No of respondents

Percentage

Friends Media Self research Total

30 8 12 50

60 16 24 100

chart showing the means through which the investors got to know about the commodity future
35 30 25 20 15 10 5 0 Friends Media particulars Self research

ANALYSIS AND INTERPRETATIONS Modern investment cycle reaching to new broad areas like commodity market. The majority of the retail investors are got awareness about the particular market through friends. The human values, human relation and attachment are more in India while considering other developing south Asian countries. The good social network of the Indian society creates much more awareness about the commodity market system in the economy. Investing in some financial securities as derivatives become prestigious factor for major citizens. The dominant influence of media in the society where it is urban or rural has creating multiple impact in the field of sales and investment. The influence of commodity market to analyze this marketing target is another factor for this particular phenomenon. Table No 12 .The investors perception about the margin charged by the company
Particulars No of respondents Percentage

Very high High Reasonable Total

percentage

2 10 38 50

4 20 76 100

chart showing the investors percepion towards the margin charged by the company
80 70

percentage

60 50 40 30 20 10 0 Very high High particulars Reasonable

ANALYSIS AND INTERPRETATIONS The investment is a process of deployment of one disposable income is moderate risky ventures and expects some what more return while comparing with the risk. The commodity brokers charge the prize from their retail investor for keeping and utilizing their money in effective way. The profit created out of the investment is by the help of the company. Investor always get profit as the reward for risk taker whose as the broking company gets commission as the reward for encouraging a chief to do some productive and prompt decision in the area of investment.From the above task the majority of the clients have a common opinion that the fee charged quite reasonable.

Table No. 13.Do you think commodity futures can be reducing the risk?

particulars

No of respondents

Percentage

Yes No Total

44 6 50

88 12 100

Chart showing the investors openion on the whether risk can be reduced by commodity futures

12

Yes No

88

ANALYSIS AND INTERPRETATIONS

Portfolio construction of every investor while investing financial market is a crucial task. Portfolio should be constructed in such a way that to reduce by risk and measure the return. The majority of the investor from the above the study have a common opinion that risk can be reduced by compiling commodity futures are involved one portfolio they can easily reduce the risk by way of switching, locking and averaging. In India, investing in commodity is regarded as a risk reduction investment while creating the portfolio.

CHAPTER-V

SUMMARY OF FINDINGS, SUGGESTIONS AND CONCLUSIONS

FINDINGS:

In risk management technique locking is considered as the best method of reducing the risk. 92% of the investors consider commodity futures as a reasonable method of investment.

 Investors carryout fundamental and technical analysis while investing in a commodity. Majority of investors are attracted with medium term investment. The inflation rate and whole sale index price (WIP) has a great role in the commodity market. Gold is considered as worth instrument to considering in the portfolio. The investors show a negative trend towards in agriculture commodities.

SUGGESTIONS:

 Before investing in a commodity, every investor should analyze the trend in the price of the particular commodity. Commodity dealing exchanges are comparatively low, link new commodity exchange for overall market development. Majority of the populations are less aware about the commodity market especially in rural areas so start educating the customer for increasing the potential market.

Conclusion

The modern investment cycle in India is reaching in a peek stage. The commodity investment also spreaded in each every corner of the country. The enthusiasm to know something about the particular market help to acquire information about each and every aspects of commodity markets. Not withstanding all the factors of commodity markets has a great influence on the overall economic system of a country. Even though, Indian economy is an agrarian economy people hardly showing to invest in a particular sector. Commodity market in India is still in a nascent stage. It should be given a helping hand by the concerned authorities to increase its depth. The infrastructure facilities like warehouses, transportation etc. should be improved so that the genuine buyers can take physical delivery of goods instead of settling transaction in cash. This may also control speculation to an extent. There is also an urgent need for an independent regulator for these markets. Instead of bureaucratic Ministry of Consumer Affairs & Food, professional agency like Forwards Market Commission (FMC) needs to be at the helm. Apart for these more products like Commodity Options need to be introduced. This will further help deepen the market & would help in increasing the popularity of such exchanges. This will finally lead to a wider investor base & lesser power in the hands of ruthless traders & speculators. Taking these few but firm steps, I believe, there is a bright future ahead for the Futures Market.

BIBLIOGRAPHY

BIBLIOGRAPHY

Websites www.ifocusindia.co.in www.mcxindia.com www.netdania.com BOOKS: A Step By Step Guide To Commodity Futures And Options Derivatives How the futures market work The Indian financial system :- George Kilenman :- B. Bramaiah and P. Subba Rao :- Jake Bernstein :- Vasanth Desai

ANNEXURE

QUESTIONNAIRE

Dear Sir\Madam I am NOUSHAD K.K a student of AL-Ameen Institute of Management studies MBA Programme , final year MBA (Finance) doing a project in IfOCUS FINANCIAL INDIA PRIVATE LIMITED ,Bangalore which is an important part of my curriculum The topic of my project is A STUDY ON RISK MANAGEMENT IN COMMODITY FUTURES I need some important information from you for the completion of my project .Would you please spare some time to answer my queries I assure that your answers will be kept confidential and will be used for the my academic purpose only

PART A

1.Name:

2. Sex:

Male(

Female(

3. Age:

20-30( 30-40(

) )

40-50(

50above(

4. Education:

Secondary

PUC

Degree

Post graduation (

5. Occupation:

Government employee (

Self employee

Business man

Private sector employee (

6. Annual income:

4 lakh

4-10 lakh

10-20 lakh (

Above 20

PART B

1.

Have you invested in commodity futures ?

Yes (

No (

2.

What are the investments you have made?

Shares

Bonds

Mutual fund (

Bank deposit (

Jewellary( )

Real estate(

2. What is your previous experience in investment ?

Good (

Bad (

Reasonable(

4.

What is your objective of trading in commodity futures ?

Less risky investment(

Diversification of portfolio (

Good return(

Others(

5.

How much the amount you have invested in commodity futures ?

2 lakh

2-3 lakh

3-5 lakh

5 and above

6. Which term you are considering while investing in commodity future?

Shot term

Medium term

Long term

7. Which commodity do you think is the most worthy?

Gold

Silver

Platinum

Crude oil (

8. How did you get to know about commodity future trading?

Friends / family

Medias

Self research

9. Which is the risk management technique you use mostly?

Switching (

Averaging

Locking

Cut loss

( )

10. What is your opinion about the margin charged by the company?

Very high

Reasonable ( )

High

11 . Do you think risk can be reduced in commodity futures?

Yes

No